Report predicts 15% drop in income

Living standards for low and middle income households will be poorer in 2020 than they were in 2008, according to a “sobering” report.

Even if growth returns to the UK economy in the coming years, incomes for the lowest groups are set to fall by up to 15% by the end of the decade.

The study, for the Resolution Foundation think-tank, by the Institute for Employment Research (IER) and Institute for Fiscal Studies (IFS) looked at the changing structure of the jobs market together with the effects of the tax and benefits system.

Their report, Who Gains From Growth?, found a low income household, which had a net income of £10,600 a year in 2008, would earn the equivalent of just £9,000 a year by 2020 - a decline of 15% in real terms.

A middle income household, which had a net income of £23,000 in 2008, would bring in £22,200 by 2020 - a real-terms decline of 3%.

The calculations assumed that GDP (gross domestic product) will recover steadily and then grow at 2.5% from 2015.

Authors of the report said traditionally middle-ranking jobs, such as administrative work and skilled manufacturing are drying up, while two million top jobs - such as managerial roles - would be created by the end of the decade, as well as 700,000 low-skilled jobs in retail, caring and leisure.

The report also said changes in the way work is spread out between households, and plans to the tax-benefit system, will contribute to the decline in living standards.

Working hours are likely to grow in higher income households faster than in households with lower incomes, while households that receive government support - particularly those with children - would fall steadily further behind.

Gavin Kelly, chief executive of the Resolution Foundation, said: "This is a powerful wake-up call - it gives us the most detailed account to date of the bleak outlook for living standards over the next decade if we fail to tackle some of the underlying weaknesses in our economy.

"It suggests that millions of families will struggle, to an extent we have not seen in other periods of growth, to progress and raise their incomes.

"It's particularly sobering that this outlook is based on optimistic assumptions about growth in the economy with a steadily rising number of people in employment."

Professor Mike Brewer, research fellow at the IFS, said: "This analysis confirms the strong currents that will be pushing against income growth in the next ten years, even once a recovery in GDP takes hold.

"Britain looks likely to see continuing polarisation in our labour market as more high - and low - paid jobs are created, skewing the distribution of income growth towards higher income households.

"Meanwhile, support through the tax and benefit system is set to fall over the long-term, particularly because of the decision to link tax credits and benefits to the lower Consumer Prices Index measure of inflation, meaning that lower income households will tend to fall behind."